10/22/12
On the anniversary of the 1987 market crash, stocks fell sharply on Friday with the Dow losing 205-points, and the broader indices were down about 1.6%. Not quite the 22.6% loss we saw in '87, but it was the first 1% loss in the Dow since June.
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[TD="align: center"] Daily TSP Funds Return[TABLE="width: 153"]
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[TD="align: right"] G-Fund:[/TD]
[TD="align: right"] 0.0036%[/TD]
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[TD="align: right"] F-fund:[/TD]
[TD="align: right"] 0.21%[/TD]
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[TD="align: right"] C-fund:[/TD]
[TD="align: right"] -1.66%[/TD]
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[TD="align: right"] S-fund:[/TD]
[TD="align: right"] -1.56%[/TD]
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[TD="align: right"] I-fund:[/TD]
[TD="align: right"] -1.64%[/TD]
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For more on last week's and the current monthly returns, see the recent Weekly Wrap Up.
It's hard to get too bearish when the S&P 500 is trading above the 50-day EMA. The problem is, many of the other indices, including the leading indices, are below the 50-day EMA.
You can see below that in May we saw a similar lower high (blue line) come down and test the 50-day EMA and that one broke down. The S&P proceeded to lose another 100-points over the next month.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Nasdaq, one of the leaders, has made another lower low and broke back below the 50-day EMA. The attempted rebound early last week failed, and while we could see a little relief rally, this chart is broken and the 200-day EMA seems like the next logical target.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The rollercoaster ride on the Dow Transportation Index may be on the way down again, and if the trading channel continues, it could be on its way to to test the lower end again. Looking some ray of hope - this index is surprisingly above the 20, 50 and 200-day EMA's, although not by much.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
As I mentioned, the Dow lost more than 1% for the first time since late June. That's more than 80 trading days without that large of a loss, after recently setting a new 52-week high.
According to sentimenTrader.com, in more than 110 years, there were only 12 other similar occurrences, and half of those were in the 1960s.
History suggests that what happens over the next week, could dictate how this plays out over the next month to six months.
Chart provided courtesy of www.sentimentrader.com
We are in the meat of earnings season now and this time of October does tend to see some selling, whether it's pullback triggered by some weak earnings reports as we saw last week, or a "sell the news" reaction after stronger reports.
Today is the 16th trading day in October and as you can see above, that is in the middle of a little rough spot historically.
The good news is, seasonality gets better by the end of the month and particularly into the early part of November.
Chart provided courtesy of www.sentimentrader.com
Of course seasonality is rarely used as a primary indicator, but for the next couple of days the market will have a little headwind, and after that the breeze will be at its back.
The TSP Talk Sentiment Survey System remains on a buy signal for this week after the 50% bulls, 40% bears, 1.25 to 1 bulls to bears ratio.
Seeing those leading indices lagging behind is not encouraging, and it makes what would seem like easy 'buy at support in a bull market' strategy a lot more complicated. The breakdowns in the Nasdaq, Russell 2000, and with the Transports turning back from resistance, are all warning signs that can't be ignored. If investors don't start buying while the S&P is still above the support of the 50-day EMA, then a break of the 50-day EMA should be enough to send them running. After a nearly 5-month rally, the character of this market is getting very close to turning bearish.
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
Posted daily at TSP Talk Market Commentary
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